CITY ORIENTE CONTINUES TO NEGOTIATE; DEPARTURE THE

C O N F I D E N T I A L QUITO 000226 SIPDIS SIPDIS E.O. 12958: DECL: 03/07/2018 TAGS: EPET EINV ECON EC SUBJECT: CITY ORIENTE CONTINUES TO NEGOTIATE; DEPARTURE THE MOST LIKELY OPTION REF: A. QUITO 55 ¶B. 07 QUITO 2665 ¶C. 07 QUITO 2277 Classified By: Classified by Charge Jefferson Brown. Reason: 1.4 b an d d. ¶1. (C) Summary. U.S. oil company City Oriente continues to negotiate with the Government of Ecuador on restructuring its contract following the imposition of a windfall income tax. The most likely option is that City Oriente will terminate its contract and receive compensation from the GOE. Renewing the contract is not appealing to City Oriente in the absence of strong international arbitration provisions. End summary. Departure the Most Likely Option -------------- ¶2. (C) City Oriente, a small U.S.-owned petroleum company, continues to negotiate with the Government of Ecuador over restructuring or terminating its oil production contract. According to manager Kyle Ford, City Oriente has based its negotiations around the three possibilities put forward by President Correa in one of his Saturday radio addresses: pay the 99 percent windfall income tax (reftel c),migrate to a services contract, or terminate the contract with compensation from the government. ¶3. (C) Ford said that a production sharing contract is not viable with a 99 percent windfall tax, so City Oriente has not focused on that option. He said that Minister of Mines and Petroleum Galo Chiriboga has said that if a company signs a new production sharing contract, the reference price would reset to current prices, and the contract would be subject to the 70 percent windfall tax contained in the new tax law (reftel a),rather than the 99 percent tax which is based on oil prices prevailing at the time the initial contract was signed. However, Ford said, City Oriente has not focused on that option since implementing regulations for the 70 percent windfall tax have not been issued. ¶4. (C) Ford said that City Oriente has presented a proposal to move to a services contract. However, Ford said that given the GOE's refusal to accept the World Bank's ICSID arbitration body in new contracts, City Oriente is reluctant to sign a new contract. He said his company has looked at other arbitration bodies that might be acceptable to the GOE, but does not find them as attractive as ICSID. He continued that City Oriente has lost the loan it had to finance its project as a result of the windfall income tax. If City Oriente were to stay it would have to invest its own capital, which it is reluctant to do without strong arbitration provisions. ¶5. (C) Since the first two options do not look attractive, City Oriente believes that the most likely outcome is that it will agree to be bought out. Ford said that his company has presented an offer whereby City Oriente would be compensated for its investment. The GOE has presented a counter offer, but the two sides are far apart. One of the major problems, Ford said, is that the GOE wants to deduct what City Oriente owes under the windfall tax law. City Oriente's position is that it has to recover its investment, and adding the windfall tax to the equation only raises the overall cost of buying out its contract. An additional complication is that the government negotiating group proposed that City Oriente be repaid out of future production from its block. City Oriente wants prompt, full compensation, but the GOE negotiators are not authorized to discuss cash repayment. Is March 8 a "Deadline?" -------------- ¶6. (C) On January 26, Correa had stated in his weekly radio address that companies would have 45 days to renegotiate their contacts (which would notionally end March 8). Ford said that City Oriente told Chiriboga that they view that date as an artificial deadline, that they have been negotiating for almost two years, and would continue to negotiate after March 8. Negotiations Continue... -------------- ¶7. (C) Ford reported that the City Oriente and the GOE negotiating team met again on March 6. Ford said that City Oriente had feared that the GOE negotiating team might take a tough position, given the pending deadline. Instead, the GOE team continued to negotiate, and the two side exchanged ideas, including discussing how to address the windfall income tax "arrears." The negotiating team said that it would need to consult with Minister Chiriboga, who has been traveling, and would be back in touch next week (after the March 8 "deadline"). ...as Does International Arbitration... -------------- ¶8. (C) City Oriente is also continuing with its international arbitration case. Ford said that Ecuador lodged a request that the arbitration panel overturn its provisional measure ordering Ecuador not to take any additional steps against City Oriente, such as cancelling its contract, until the panel is able to rule on the merits of the case. Ford said that the panel will issue its decision on the request sometime after March 6, and that he expect it will uphold the provisional measure. He said that the government wants City Oriente to withdraw its arbitration case, which City Oriente would do, but only as part of a comprehensive settlement. ...and a Criminal Investigation... -------------- ¶9. (C) Kyle reported that City Oriente continues to cooperate with a criminal investigation initiated by Attorney General's office following complaints filed by congressional deputy and the Solicitor General (reftel b). The Attorney General's office has to conclude its investigation by March ¶17. City Oriente believes that the charges to not have any merit. However, it reported that the official investigating the case asked questions that went beyond the specific charges and inquired about unrelated contractual matters. City Oriente is concerned that the investigator might file a report addressing tangential contractual issues that could undermine its ongoing contract negotiations. ¶10. (C) At City Oriente's request, EconCouns met with Attorney General Washington Pesantez to note that we understand the need for his office to investigate a complaint, but at the same time we want to highlight that the investigation involves issues that are also being addressed in contract negotiations and international arbitration. Pesantez replied that he would proceed carefully in the investigation. ...and City Oriente's Regular Operations -------------- ¶11. (C) Ford commented that City Oriente has been allowed to operate normally, producing and exporting petroleum in compliance with the terms of its contract, even as it juggles the contractual negotiations and legal challenges. Comment -------------- ¶12. (C) It would be unfortunate if another U.S. petroleum company leaves Ecuador because of the difficult investment climate. City Oriente is the last U.S. petroleum production operating in Ecuador (although two other U.S. companies are minority partners in other consortiums.) However, if City Oriente does leave, better that it do so under mutually agreed terms with the GOE. City Oriente believes that Minister Chiriboga is negotiating in good faith and wants to reach an agreement, in part because he wants to maintain good ties with the United States. It remains to be seen if the GOE and City Oriente can agree to terms or whether the GOE will find the financing to pay City Oriente up front to terminate the contract. BROWN